2017 Federal Tax Act – Individual Tax Provisions
The most salient provisions of the 2017 Federal Tax Act, applicable to individuals, most of which will revert back to today’s law for tax years after 2025, are as follows:
- The 2017 Federal Tax Act retains seven income tax rates but most have been reduced – 10%, 12% (formerly 15%), 22% (25%), 24% (28%), 33% (32%), 35% (no change) and 37% (39.6%). Changes have been made to the applicable income levels at which each rate applies, and these brackets will be indexed for inflation after 2018.
- The standard deduction has been nearly doubled to $12,000 for single filers (formerly $6,350), to $18,000 for head of household filers ($9,350), and to $24,000 for married couples filing jointly ($12,700).
- Numerous changes have been made to the various exemptions and deductions allowable in determining taxable income generally, including:
- The personal exemption of $4,050 per person is eliminated.
- The deduction for state and local income, property and sales taxes is now capped at $10,000.
- Home mortgage interest is deductible for new purchases made between 2018 and 2025 to the extent of only $750,000 of acquisition indebtedness, and no deduction will be permitted for home equity lines of credit.
- Cash contributions to public charities will now be deductible up to 60% of adjusted gross income (AGI) (formerly limited to 50%).
- Medical expenses in excess of 7.5% of AGI will be permitted in 2017 and 2018 before reverting back to the 10% threshold thereafter.
- Miscellaneous itemized deductions (e.g., tax preparation fees) in excess of 2% of AGI are no longer permitted.
- Personal casualty losses, which includes theft losses, other than as a result of natural disasters are no longer permitted.
- However, the deductions for investment and student loan interest were retained.
- The individual alternative minimum tax (AMT) was retained but with increased exemption levels for individuals ($70,300, up from $54,300), married couples filing jointly ($109,400, up from $84,500) and those married couples filing separately ($54,700, up from $42,250). The exemption now phases out at much higher levels as well - $1 million for married couples filing jointly and $500,000 for all other filers.
- Eliminates the alimony deduction for payors, and corresponding income inclusion for payees, for divorce and settlement agreements entered into after 2018.
- Section 529 Plan functionality was enhanced by now allowing rollovers to ABLE accounts.
- The individual mandate and associated tax penalty to procure health insurance under the Affordable Care Act is repealed after 2018.
- Other notable tax provisions that were unaffected by the 2017 Federal Tax Act, but which were under discussion to be changed during the legislative process include:
- Preferential long-term capital gains tax rates remain unchanged, as is the applicable one-year holding period to qualify for such.
- The 3.8% surtax on the net investment income of certain taxpayers was also retained.
- No change to the accounting method for determining gain on the sale of stocks and securities (a FIFO method had been under consideration).
- Tax deductible contributions to 401(k) plans, including catch-up contributions for those over age 50, remain the same as under prior law.
- The exclusion for certain gains arising from the sale of a principal residence remain unchanged, as does the holding period for qualifying for such exclusion.
- The federal estate, generation skipping transfer and gift taxes were not repealed, but the applicable exemption levels were doubled to approximately $11 million per person ($22 million per married couple) for 2018 and will be adjusted upwards for inflation annually going forward. The annual exclusion amount for lifetime gifts remains unchanged. The tax rate also remains unchanged at 40% for transfers in excess of the applicable exemption amounts. However, the exemption amounts revert back to existing levels after 2025.
- The bases adjustment at death under Code Section 1014 was fully retained.
- The number of income tax rates applicable to income earned by a trust that is not otherwise taxable to the beneficiaries was reduced to four rates with a top rate of 37% applicable to trust income in excess of $12,500.
In the interim, for questions, information, or guidance, please feel free to contact Bill Hussey (firstname.lastname@example.org; 215.864.6257), John Eagan (email@example.com; 212.868.4835), Kevin Koscil (firstname.lastname@example.org; 215.864.6827) or another member of our Tax and Estates Group.